ROAD WARRIOR: Gas prices at nine-tenths of a cent: When, and why?

Gasoline pricing at nine-tenths of a cent dates to the 1930s, likely prompted… (Handout, THE MORNING CALL )

March 21, 2013|Dan Hartzell | The Road Warrior

Q: Why is gasoline charged at $3.799 per gallon? I'm questioning the nine-tenths part. Who was responsible for this addition to the price? Probably some government agency.

— Kathryn Thompson, Hanover Township, Lehigh County

Q: Why does the price of a gallon of gasoline include nine-tenths of a cent in the price, instead of it simply being some whole number? When was this pricing philosophy introduced, and by whom?

— Ed Reinbold, Coplay

A: According to my research, and an excellent history of this issue compiled by Jeff Lenard, vice president of the National Association of Convenience Stores, taxes and gas-pump measuring capacity were the two biggest factors that drove gasoline sellers to nine-tenths pricing.

Marvin Myer of Allentown steered this query onto my email parking deck back in 2007. At that time a spokeswoman for Exxon/Mobil candidly replied that she had no idea how this pricing oddity came about.

Officials at the American Petroleum Institute said fractional pricing hit the road in the 1930s, driven in part by the first gas-tax increase in the United States: A rise from 1 cent to 1.5 cents per gallon in 1933. Fractional pricing likely appealed to Depression-era gas stations, because with prices dropping to 20 cents per gallon, a 1-cent increase equates to 5 percent. That's like a boost of 19 cents per gallon at today's prices.

Lenard mapped a similar route in his more recent search for this pricing oddity. The half-cent tax hike "likely [was] the trigger in changing retailers' mindset about how to price" their product, Lenard writes on the NACS website. NACS says its members pump 80 percent of the gasoline sold in the country.

At the same time, Lenard points out, the gas market had morphed from Roaring '20s boom to post-crash bust, torquing up competition among surviving sellers. According to API, as more discount service stations surfaced, the half-cent pricing adopted by sellers eventually cranked all the way down to tenths of a penny.

A factor cited by Lenard that I hadn't previously heard: Prior to the 1930s, gas pumps weren't sophisticated enough to accurately measure the quantity needed for under-a-penny pricing, so it couldn't have been implemented even if someone had thought of it. But by then the mechanisms, invented in the 1880s, "had advanced to a level where they could dispense fuel to the fraction of a penny," he writes.

As time went on, this pricing practice morphed from a narrow side-street to a major thoroughfare, Lenard concludes: "Fuel retailers, many of whom were sophisticated marketers … found that they could increase sales when they dropped their price by one-tenth of a cent when it otherwise would have been priced at a whole number, and soon the practice became commonplace."

The post-war years brought us the Dwight D. Eisenhower National System of Interstate and Defense Highways, and all those high-speed highways turned the key on gas-price signs large enough to be absorbed by motorists blistering along at 55 or 60 mph. Even at those speeds, according to Lenard, motorists still are less likely to notice the little "9" to the right of the Hummer-size full-cent price numerals. (Back then, only cents and nine-tenths numerals were needed; dollar-a-gallon gas was unimagined till it arrived in shocking fashion in the 1970s).

The tenth-cent pricing practice survives to this day because the cut-throat competition never really eases off the gas, according to Lenard.

"Overall, the average fuel retailer today makes about 3 cents per gallon selling gas," he writes. "That 0.9 cent in the price makes up about 30 percent of a typical store's profits selling fuel in an incredibly competitive marketplace."

Legislative efforts to slam the brakes on nine-tenths gas pricing have proved unsuccessful. A 1985 Iowa law forbidding the practice was repealed in 1989, and a subsequent effort to revive it failed to gain traction. I could find no similar legal provisions in effect in any state.

Lenard found that some sellers voluntarily have test-driven detours of nine-tenths pricing, only to reject the seemingly saner sticker-price approach.

It's almost a universal practice to set prices at just below round numbers — merely a psychological tool, and it's curious as to why it persists. We certainly realize that it's a ruse, a little mind game, yet it must be effective or it would have vanished long ago. My parents thought they'd died and gone to heaven in 1955 when they were able to buy a two-bedroom ranch house in Whitehall, with a washer and dryer thrown in as incentives, not for $10,000, but $9,995, which seems like more than a five-dollar difference.

With Canada having sent its penny coin to the scrap heap — something our government has considered, since our penny costs more than twice its own value to produce — perhaps less-than-a-cent gas pricing could steer onto Junkyard Road as well. It's just that it might be a long road.

Other than gasoline's cousin, heating oil, I can think of only one other commodity priced at fractions of a cent: electricity. PPL Electric Utilities charges me 3.146 cents per kilowatt hour, blowing gas pricing off the road by pricing to one-thousandth of a cent. Incidentally, my bill lists the charge as "3.14600000 cents". I sure hope they don't plan on using all those zeros. That would be taking it to the one-hundred-millionth of a cent.

Road Warrior appears Mondays and Fridays, and the Warrior blogs at mcall.com. Email questions about roadways, traffic and transportation, with your name and the municipality where you live, to hartzell@mcall.com, or write to Road Warrior, Box 1260, Allentown, PA 18105-1260.